More on RESPs

RESPs are often misunderstood in terms of what happens when the owner of an RESP passes away. Let's say that Joe owns an RESP for his grand-daughter, Julia. Most people think that if Joe passes away, the money will go to Julia, or at least be held in trust for her. In most cases, they'd be wrong.

Unless the proper paperwork has been done specifically to deal with Joe's passing, the money in the RESP stays in Joe's estate and is distributed according to his will (or the laws of intestacy). The portion of the RESP that was received in the form of government matching funds will be returned to the government.

Most RESP owners tell me that this is not what they would like to see happen should they pass away before the child is old enough to use the RESP. I'm attaching an article from www.allaboutestates.ca that talks about the planning you should do if you own an RESP and you want it to carry on in the event of your death.

Click here to read the article. As a bonus, the article also suggests how an executor dealing with an estate might rescue an RESP from being collapsed back into the estate.

Which assets does an executor deal with and which are outside of the estate?

This reader has questions about the powers and responsibilities of an executor and trustee, and which assets fall within their control. This information is essential to the estate administration process, so I thought I'd cover it here for all to read.

Here's the question:

"When an estate is probated do all assets fall under the probate or can some things be dealt with before hand such as banks, life insurance and investments and if something needs to be done through probate can we proceed at that time? If the executrix/trustee is not a joint tenant of the house, who is responsible for selling the house? Would it be the joint tenant or the trustee?"

Parts of this question are quite clear to me, though I'm not sure I understand the part about dealing with assets "before hand". I'll get to that, though.

All assets owned solely by the deceased fall into the estate. The two types of property that don't fall into an estate are both mentioned in the reader's question. One type is an asset that is jointly owned by the deceased with someone else. The other type is an asset with a designated beneficiary. These are usually life insurance policies, RRSPs, RRIFs and pensions.

Note that this does not include RESPs, which do not go to the child named in the plan, but stay in the deceased's estate.

If the house was owned by the deceased and a joint tenant, on the death of the deceased the ownership passes to the other joint owner. It would be up to the other owner to arrange for the title to be changed. Please note that where the joint ownership is between generations, such as between a parent and a child, this is THE OPPOSITE. Joint title doesn't automatically go to the child joint owner when the parent dies. The child is deemed in law to be holding the title on trust for the estate, and it's for the executor to deal with.

If the house was not held in joint tenancy but was held just by the deceased alone, it becomes part of the estate and it's the executor's job to sell it or transfer it in accordance with the will. This cannot be done before probate is issued by the court.

I'd like to get into the part about dealing with assets before hand. If the question is whether any of the assets can go out to the beneficiaries before the deceased actually dies, the answer is no. To me that seems starkly obvious but I'm asked the question frequently enough to know that not everyone sees it that way. If the person hasn't died, keep your hands off their assets even if they have named you specifically as beneficiary.

Once the deceased has passed away, the executor should advise any joint owners of the death of the deceased and tell the joint owner it's up to them to change the title. The executor should advise life insurance companies of the death of the deceased, and let the insurance company deal directly with the person named as beneficiary in the policy. The executor should also advise the bank that holds the RRSP or RRIF and let the bank deal directly with the beneficiary who will receive the funds. The executor should co-operate by giving copies of the death certificate etc to allow these other parties to get on with the business at hand. Probate is not required for these transactions.

The deceased certainly can - and should - deal with these assets before death by naming the beneficiaries on the life insurance, RRSP etc. During the estate planning process, joint assets and beneficiary designations are part of the same big picture that includes the will and power of attorney. It all has to fit together.

Anyone with this type of question who lives in Alberta can check out my "Alberta Probate Kit" book, as it covers these topics in much more detail.

RESP primer

Now here's a really useful link. It goes to an article that describes RESPs and how they work, without clogging it all up with legalese or bank-speak. Click here to read this article from Canadian Capitalist.

An estate planning checklist (or, Stop Going Out in a Blizzard in Nothing But Your Boots)

What's the difference between estate planning and getting a Will made? It's approximately the same difference as going out in the middle of a -40 Alberta blizzard wearing a parka, mitts and boots, versus going out into that same freezing weather wearing nothing but the boots. The parts that are covered will be fine. The uncovered bits, not so much.

The elements of an estate plan, pared down to their essence, are:

1. A Will. Important issues are the choice of executor, the choice of a guardian for minor children, distribution of your assets to your beneficiaries according to your wishes, and the inclusion of powers for the executors and trustees.

2. A Continuing, Enduring or Durable Power of Attorney. Important issues are the choice of attorney to represent you, how or when the document is to come into effect, and controls on the attorney. May include addressing immediate needs due to incapacity.

3. A Health Care Directive. Again important is the choice of agent to represent you, and the clear expression of your wishes. For older individuals, may include discussion of various supported living arrangements to address limitations.

4. Title to various properties. Important decisions are joint ownership and tenancy in common, right of survivorship, tax effects, potential disputes, and effect on overall estate plan.

5. Insurance coverage. Major issues are ensuring liquidity to cover tax liability, creating new wealth for distribution and keeping up with changing lifestyle insurance needs.

6.  Beneficiary designations. Tax savings are important. Also important are obligations to a spouse, the impact on the overall estate plan and creditor-proofing. Affects RRSP, RRIF, TFSA, ESOP, LIRA, DRIP, pension and life insurance.

7. Business succession planning. Important issues are choice of family successor, other possible exit strategies, tax planning, future income and timing. Should tie in with shareholder's or buy-sell agreement and company-owned life insurance.

8. Tax planning. Looking for ways to minimize taxes and maximize funds for distribution in the estate.

9. Trusts. Important issues are income-splitting for tax purposes, protection of handicapped adults, protection of children, and preserving assets to be inherited by a beneficiary at a later date.

10. Charitable giving. Important issues are giving back to the community, creating lasting legacies and creating tax credit.

11. Retirement planning. Includes discussion of dissipation or sale of current assets, business succession timelines, planning for incapacity and changing insurance needs.

12. RESP. Appoint a successor director of the plan.

13. Family dynamics. All of the items on this list are discussed in the light of the roles, abilities, shortcomings and personality of the various members of the family. Issues that may crop up are subsequent marriages, children from different marriages, separation agreements, divorce, common law arrangements, illegitimate children, disabled children, children vying for a place in the family business, belligerent or overbearing children, disputes between spouses or children, estranged family members, greedy or untrustworthy family members, and children with addictions.

As you can see, the items listed here overlap and loop back to each other. The idea is to make sure that everything works effectively together to achieve your goals. So use this checklist for your own planning and stop going out in just your boots.

The mysterious world of RESPs revealed

In this article from the Globe and Mail, the author describes what he calls seven of the trickiest aspects of RESPs. I think there are actually 8, if you bring estate planning into the picture. This is minimally touched on in tricky aspect #6, where he says that students have no control over the RESP and mentions that the beneficiary has no claim on them.

This is true, and it catches many RESP owners by surprise. We are used to certain plans that name beneficiaries, such as RRSPs and RRIFs, and we know that should we pass away the beneficiary we have named is going to get the money. We think that it works the same for RESPs. We are completely wrong about that.

If you own an RESP and have named your child as the beneficiary, then die before your child has used the money, your child doesn't have any claim to the money. If there is another owner of the RESP (say you and your spouse owned it together) then that owner could carry on with the plan uninterrupted. But what if there is no other owner of the RESP and your will doesn't appoint one? In that case, the RESP will collapse, the money you've put into the plan will fall back into your estate and all government contributions will have to be repaid. Probably not what you had in mind.

To avoid this, make sure your Will specifically names someone to be the owner ("director") of the RESP on your death.

To read the Globe and Mail article, click here.

Advice for opening an RESP

Some good advice from the Globe and Mail about RESPs. Click here to have a look. To add to the advice offered here, I suggest that you also ask what happens to your RESP if you should pass away before your child has used the funds.

(attached photo also taken from that article)

Don't make this common mistake with your RESP

RESPs are a popular way for parents and grandparents to save for a child's education. The government matches a portion of the contributions put in by the owner of the plan, making the plan grow nicely.

Sometimes the parent or grandparent dies while the money has not yet been used by the child and is still in the plan. The problem is that most people misunderstand where the money is going to go at that point and this results in disappointment, delays and lawsuits.

Most people incorrectly compare the RESP to the more familiar RRSP. We know that if we name somebody (a beneficiary) in our RRSP, on our death the named beneficiary gets the money in the RRSP. On the face of it, an RESP looks similar because it also names someone, namely the child whose education is being saved for. It appears that on the death of the person who owns the RESP, the child should get the money in the plan. But it doesn't work that way.

If a person is the only owner of an RESP , he or she is also the director of the RESP, that is, the person who makes decisions about how and when the money will be paid out on behalf of the child. Most people don't think to name anyone else as an alternate director. If the owner/director then passes away, the money still belongs to him or her and not to the named child. The RESP will then be an asset of the estate and will be divided according to the deceased person's Will, or if there is no Will, according to provincial intestacy laws.

If the RESP goes back into the estate, the portion of the money that is made up of government contributions over the years must be repaid to the government. The child won't get anything.

At this point, the child's parent or other guardian will usually protest that another director can easily be found, but the executor is not allowed to give away estate money other than as directed under the Will. If the child is not one of the beneficiaries under the Will, then the executor, who must always do what is in the best interests of the estate, can't decide to ignore the Will and pay the child anyway.

The easiest solution is to name an alternate director or a joint director at the time you set up the RESP account.

Another simple solution is to name someone as a director of your RESP plan in your Will. This is something that an experienced Wills and Estates lawyer would think to ask anyone who has school-aged children.

This is one (or should I say one more) reason that I am not a fan of home-made Wills. It's just so easy to leave out something that you have no idea would help you. If you have an RESP, check it to see whether you are the only owner on the plan. If so, do something about it.